Welcome to the Neogen Corporation First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now turn the conference over to Bill Waelke, Vice President of Investor Relations. Please go ahead, sir.

Thank you for joining us this morning for the discussion of the first quarter of our 2024 fiscal year. I'll briefly cover the non-GAAP and forward-looking language before passing the call over to our CEO, John Adent, who will be followed by our CFO, Dave Naemura. Before the market opened today, we published our first quarter results, as well as a presentation with both documents available in the Investor Relations section of our website. On our call this morning, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the presentation, Slide 2 of which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. With that, I'll turn things over to John.

Thanks, Bill. Good morning, everyone, and welcome to our earnings call covering the first quarter of our 2024 fiscal year. We've made significant progress across a number of fronts on the integration of the former 3M Food Safety business, while continuing to navigate soft market conditions. Our results for the quarter were largely as anticipated with two primary exceptions, greater than expected weakness in Asia and in genomics, along with a couple of unanticipated cost items. For Neogen in total, we saw core revenue growth decline by 0.4% in the quarter on a pro forma basis, which includes a negative impact from China of approximately 1%. In our legacy Food Safety business, core revenue growth was in the mid-single digit range, including positive volume growth in an end market where food production volumes continue to be down on a year-over-year basis for many producers. Additionally, certain producers have taken capacity offline in order to right-size the output from higher levels last year to the current environment. On our Animal Safety segment, we continued to see the impact of destocking in the distribution channel. Sales out of the channel to our end customers remained positive compared to the prior year with large veterinary distributors continue to reduce their purchases. Based on the data we have from the larger distributors in North America, channel inventories are at a three to four year low. In the former 3M Food Safety Division, the progress made with production levels at our transition manufacturing partner in Q4 of last year was maintained. For the former 3M division in total, core revenue grew by approximately 1% in the first quarter on a pro forma basis. Backlog remains at reasonable levels following the progress in the prior quarter catching up on past due orders, which helped drive a…

Thank you, John, and welcome to everyone on the call. Jumping into the results, our first quarter revenues were $229 million, an increase of 73% compared to the same quarter a year ago. Core revenue, which excludes the impact of foreign currency, acquisitions, and discontinued product lines declined just over 1% for the quarter. Acquisitions and discontinued product lines added a net 73%, while foreign currency was a 1% tailwind compared to the prior year. On a pro forma basis for the 3M transaction, core revenues declined modestly, down 40 basis points compared to the prior-year quarter or approximately $4 million to $5 million below our expectations, driven primarily by lower sales in Asia. In Asia-Pacific, customers were more impacted by the Petrifilm supply constraints we experienced last fiscal year, leading to what we believe will be a slightly longer path to demand recovery. Our China exposure is small, representing less than 3% of total company revenue, but worsening macro conditions there contributed to significantly lower sales in the quarter. Moving now to the segment level, revenues in our Food Safety segment were $166 million in the quarter, an increase of 157% compared to the prior year, including core growth of 4.5%. The core growth was led by the Bacterial and General Sanitation product category, which benefited from new microbiological testing business in the U.S. and U.K. Natural Toxins and Allergens also had solid core growth with a notable increase in sales of milk and gluten allergen test kits. Within the Indicator Testing, Culture Media and Other category, modest core growth in Culture Media was offset by a decline in food quality and nutritional analysis sales due in part to international distributor ordering patterns. Quarterly revenues in the Animal Safety segment were $63 million, a core decline of just under…

Thanks, Dave. As you heard today, we believe we're making solid progress on the integration of the former 3M business and are on track to be completely independent from 3M in the third quarter outside of Petrifilm manufacturing, but we feel that arrangement is in a stable place. Our new ERP system is up and running after the Phase 1 launch, which is a significant step to have behind us. And we will work diligently through the backlog of open orders as we continue to become more efficient in our new ERP system. We still have significant work ahead of us though. With key activities taking place in the second, and third quarters, as we implement the final steps needed to relocate production and exit the transition services agreements. In addition to the important step of gaining full operational control of this part of the business there the associate -- there are the associated savings we expect to see from exiting the agreements and we fully anticipate ultimately achieving greater efficiency and utilization in our footprint. Having now crossed the one-year anniversary of the 3M transaction, we are excited about the opportunities we have to leverage our leading position in the Food Safety markets. Our sales and R&D teams are now approaching one year of working together on the combined product portfolio, building momentum that will result in new commercial opportunities, particularly as the market conditions improve. Our team members around the world have worked tirelessly on advancing the integration process and I want to wrap up here today by thanking them for their hard work. We have a shared goal that we are ever mindful of to remain the global leader in food safety and help protect the world's food supply. I'll now turn things over to the operator to begin the Q&A.

Yes. Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble the roster. And the first question comes from Brandon Vazquez with William Blair.

Good morning, everyone, and thanks for taking the question. And I guess, first just to start on guidance at kind of a high level. I think some of the weakness in the quarter was coming from worsening macro, especially like in China, given update seem to be kind of negative out of there. Just curious, what gives you guys kind of confidence around reiterating the guidance range? Obviously, that was encouraging to see maybe an indication of the underlying momentum you guys are seeing, but, again, in kind of a worsening backdrop in macro that seems to be out of your control a little bit, what are you guys seeing that's giving you guidance or comfort in that guidance range?

Yeah. Thanks, Brian, and thanks for being here. I think specifically to China, what we're seeing is that, it's a relatively small piece of the business, it's only 3% of revenue. So, while China was a challenge, as we look forward, it was a particularly tough quarter that had a tough comp. But I don't think it’s going to repeat, so we don't see that big of a drag. For the overall markets, it's pretty similar to what we've been seeing, food production volumes are slow, the distributor channels destocking, that's kind of what we thought was going to happen for the year. And so, while this quarter was about a $4 million miss on what we expected it to be, we feel pretty comfortable about where we are on end-user demand. I think, like we talked about kind of the wild card is making sure that we're getting the product out the door with the SAP conversion. I'm really proud of the team on what we've been able to do under the SAP conversion. You hear all the horror stories, but you don't hear the good stories. This is one of the good stories, right? We're 40 days in, we're immediately able to do order to cash, build customers, pick pack and ship, manufacturer, but we're just not as efficient and it's going to take us a little while to get that efficiency up, so we're caught a little bit behind. We think we can catch up in October, November, but as Dave talked about, there may be a little bit of carryover going into the third quarter. So, I'll let Dave talk a little bit more about guidance as we ever had.

Yeah, I think that -- Hi, Brandon. I think John summarized it pretty well. I guess I'd just highlight, we've talked about the first half being softer and that's what we're seeing. But outside of Asia Pacific, where I think we have some challenges that we noted in the prepared remarks, we saw, particularly, the Food Safety business grow pretty good outside on a global basis outside of Asia-Pac. So there is some strength there but I think the environment is not too different than we had anticipated.

Okay. And Dave, maybe as a follow-up to that, you just hit on -- you guys mentioned on the prepared remarks a little bit that there are some, I think, the phrase John had used was that, unique challenges to Neogen in APAC. Can you guys maybe talk about some of those challenges that are unique to you guys? What you're doing to try to maybe fix some of those efforts?

Yeah. What we -- what we mean by that was, when 3M was struggling with their production of Petrifilm, APAC was asymmetrically hurt regarding supply. And so, you had almost 24 months of supply disruption, which really challenged customers because they just -- they had to do other solutions and they had to find ways to continue to run their business without the Petrifilm product. And so, the unique challenge to us is, we have to earn back their trust, Brandon. We've got to show them we have supply. One quarter they're like great, but show me another quarter. So now we're two quarters in where supply is where it needs to be, but it's going back to those customers and winning back their trust that, now under our regime, we fix the supply issues that weren't able to be fixed for two years and earned their trust back and get that business back.

Okay. And maybe I'll throw one last follow-up to that and then I'll let someone else get in queue here, but as you look at APAC and you're talking about winning trust back, you guys have a sense of where those customers are going. I think often when we talk to experts, they follow on kind of like backup plans, are they moving to competitors? Do you think this is kind of temporary? Any thoughts around that? Thanks.

Yeah. It's a little bit of both. It's not so much traditional methods there. We did see some move to competitors, but we're seeing those customers come back. That's why I said in prepared I was encouraged, because we're starting to see that move -- that move back, but it's -- it takes you two years to lose them and it's going to take us a little while to get them back, but I think we're really confident that our solution and our -- the things that we provide around our product portfolio of solutions and people are just head and shoulders above our competitors. So we're going to get that business back.

Thank you. And the next question comes from Tim Daley of Wells Fargo.

Great, thanks. So, John, just could you give us a bit more details on the genomics? I think the term has attrition of two U.S. customers, please.

Yeah.

And did that impact the kind of like a below expectations revenue in the quarter?

Yeah. Thanks, Tim. So, we had two large customers that are in very challenging markets right now, in poultry and swine and we're putting extreme pressure on pricing and other solutions for us. And for years these have been good volume customers but relatively low-margin customers. You've seen that we've been moving to transition the genomics business to different species that are higher value, higher margin, and when the pressure came and they wanted a significant price decrease, we declined. So we’ve made the decision that even though it's going to hurt us on volume, it wasn't as significant from a profitability standpoint. So that's really what drove that decision.

All right. No, I appreciate that that detail. And just -- just thinking about those two customers, is there something that we could take out of the [indiscernible] model here in terms of 2023 revenues? Any color around percent of revenues maybe those two customers that accounted for or would have accounted for going forward?

Hi, Tim, it's Dave. I think it's in the guide. I would say the new news for us a little bit in the quarter wasn't these -- wasn't these folks. I would say, things came in generally a little bit lighter. I think some -- because of some of the end market pressures. But I think this more describes the kind of the absolute growth rate. I'd say it's contemplated in the guidance.

All right. Got it. Perfect. And then thinking about the destocking, just I know new commentary around, I think the channel is that low -- pretty low levels here, just when should we think this rebound or how long should these low levels sustain of inventory before going back to normal or are we at new normal at low levels. Just additionally thought here on timing?

Yeah, Tim, I don't think we're at a new normal. I think this is abnormally. Low and based on what we're seeing end user demand, so we see what goes in and what goes out on end-user demand, like I told, we have always been bad at calling the bottoms, but to me, this is not a sustainable model. So I feel pretty comfortable, like we talked about the second half of the year where we think that you can't drive inventories down that low and it still provides the type of service levels that distributors want to provide to their customers. So I think this is a -- it's something that we contemplated and we think probably in the back half of the year is going to -- going to improve.

All right. Got it. Then Dave, final one for me, and I'll pass along. So could you just walk us through the transition agreement here in terms of the pathogen and sample handling lines as a percent of like, you called it out, 30% of revenues? How much of the, I guess, transition manufacturing agreement costs are those product lines? And how should we think of like the day-one margin impact as those total costs roll off, if you will?

Yeah. Tim, look, we're obviously standing up a reasonable amount. There's costs from kind of move and kind of one-time in nature, but we're standing up recurring costs to accept those product lines in. And when those happen, to your point, we won't be paying the manufacturing transition fee. I think net-net, that's accretive to us; tough to quantify too sharply and some of the costs are overlapping, but we -- you had seen us put forward a schedule in the spring about where we expected to be from an integration standpoint at the end of our third quarter. Hopefully, it took away from the call that we feel at least here after the first, we continue to track to that. I think the other thing I'd add is that on the OpEx line, you know we have some duplicate costs as well that we'll see come out for the fourth when we -- when we're able to get to that point of integration that we previously noted. So just under 23% adjusted EBITDA margin for the first, I talked about 100 basis points of some kind of unanticipated headwinds, but there's probably another 100 basis points of duplicate cost in there. So we got to manage it well, but I think the fourth quarter and really the exit rate for the year is how I think about it, is where we should see us down to just manufacturing, transition fees related to manufacturing of Petrifilm, and then of course, that becomes an issue in the coming years. So maybe not as precise an answer as you're looking for, but hopefully that contextualizes it.

No, that was great. Appreciate the time. Thanks, everybody.

Thanks, Tim.

Thanks, Tim.

Thank you. And the next question comes from Dave Westenberg with Piper Sandler.

Hi. This is John on for Dave. Thanks for taking the questions. So can you give any additional details on the ERP implementation? So, there was some revenue that was shifting from -- between the different quarters from the second quarter. So can you just walk us through what the implementation issues were, what the degree of the shift was, and what the areas were that shift was mostly around?

Yeah. Thanks, John. Like we talked about in the prepared remarks, when you build a new ERP system, you will not be as efficient day one as you were on the old system, because you had spent 20 years on the old system and you knew it backwards and forwards. So, like I said, the good news was the business was up and running, we were able to do all the functions, nothing stopped. It's just we're not as fast and -- really around warehousing than we are in everything else that we were before. So, we're finding a way to continue to train the teams. We're seeing sequentially daily that that is improving day-by-day. But we had a period of time where that wasn't at our average and so we've to overperform to get to the average. And I don't know Dave has got a couple of comments on this. Dave?

Yeah, just to make sure we're clear, so this didn't affect the end of the first quarter. So we went live for the first day of the second quarter. So what we're looking at is in the first -- the first month of our second quarter here and our shipments were out the door and we carried over open orders from September into October and that was low double-digit millions, whereas it usually be much, much lower than that as we ship at a slow rate, you got to make that up, right? So the question is, do we carry over some of that out of the second? So our goal here was to share, you know, I think first and foremost that the implementation went well. I think that's the headline. And as anticipated, maybe we're shipping a little bit slower than we otherwise may have and that we got our -- we're kind of calling it out as potentially a shipment timing risk for the second. Some of that might push to the third. But what we really got our eye on is the demand backdrop. I would say through the first month. Hopefully, you heard from us that feel supportive.

Got it. Thank you. So, also we heard that Walmart had suggested that consumers are reducing their buying because of GLP-1. Are you actually hearing food producers saying anything similar?

We're hearing the same things that you're hearing. Most of them are watching. They're understanding that it may have an impact. And we're looking at the same thing, John. I think, if you look at it on a relative scale and size of our business, GLP-1 will be a headwind, but it is going to be a relatively small headwind compared to the big tailwinds we have around this business, around increased regulatory environment, increased customer usage, expanding into new geographies, developing new products. So while it may be a headwind going forward, it is going to be a, I think, de-minimis headwind.

Got it. Thank you. And just one last one. Sorry, if I missed it, but have you -- do you think that any customers stocked Petrifilm earlier in the year during supply constrained environment?

Sorry, I didn't get the question. [Multiple Speakers]

Yeah. Can you say it again, John?

Yeah. Sorry if I missed it. But did -- is it your understanding that any customers stock Petrifilm earlier in the year during more supply-constrained environments?

So, I don't think we've -- I don't think we've seen that. You know, I mean, as you know.

Got it. Thank you.

Thank you.

Thank you. And this concludes the question-and-answer session. I would like to turn the floor to management for any closing comments.

Thank you. Yeah. As we stated earlier, while the quarter was a little softer than anticipated, I think what we wanted to talk about was the success really of the integration and moving off our two transition services agreements and standing up ERP. And for those of you that have been involved in a lot of different companies, those were significant risk factors that could derail organizations. And I'm really proud of the team and the work they've done and the ability to plan and execute kind of seamlessly to continue to move to the new Neogen and the One Neogen environment. So, we’re really excited about the future. We look forward to talking to you in the second quarter. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.